2014 (2) TMI 1274 - AT - Income Tax

Income from transaction of shares - short term capital gain or business income - Held that - The CIT(A) after applying the proposition laid down in the various decisions as discussed above with respect to the facts of the instant case and also keeping in view frequency and continuity of transactions, it recorded categorical finding to the effect that profit earned in respect of four companies as discussed above amounting to ₹ 18,41,027/- was liable to be taxed as business income rather than capital gain. However, in respect to balance of transactions, the CIT(A) has categorically recorded a finding that these were delivery based transactions, therefore, keeping in view the frequency, continuity and volume of transactions, profit arose therefrom are liable to be taxed as short term or long term capital gains depending on the period of holding. The findings recorded by the CIT(A) are as per material on record, therefore, the same do not require any interference. Accordingly, we do not find any infirmity in the order of CIT(A), which is being upheld.

Issues Involved:
1. Treatment of short-term capital gain on sale of shares.
2. Whether the gains from share transactions should be classified as business income or capital gains.
3. The application of the rule of consistency in tax treatment.
4. The impact of frequency and volume of transactions on classification.
5. The effect of borrowed funds on the nature of income.
6. The relevance of separate portfolios for investment and trading activities.
7. The implications of the CBDT Circular No. 4 of 2007.
8. The significance of past assessments and the principle of res judicata.

Detailed Analysis:

1. Treatment of Short-Term Capital Gain on Sale of Shares:
The main issue revolves around whether the short-term capital gains (STCG) declared by the assessee should be treated as business income. The Assessing Officer (AO) treated the entire STCG as business income due to the volume and frequency of transactions. The CIT(A) partly allowed the assessee's claim by treating a portion of the gains as STCG and the rest as business income. The Tribunal upheld this partial treatment, emphasizing the need to consider the intention behind the transactions and the treatment in the books of accounts.

2. Classification of Gains from Share Transactions:
The AO argued that the numerous transactions, their volume, and frequency indicated that the assessee was trading in shares rather than investing. The CIT(A) and Tribunal considered various factors, including the intention at the time of purchase, the treatment in the books, and the holding period. They concluded that while some transactions indicated trading activity, others were consistent with investment activity, thus justifying the mixed treatment.

3. Rule of Consistency in Tax Treatment:
The assessee argued for the application of the rule of consistency, citing previous years where similar transactions were treated as capital gains. The Tribunal acknowledged the principle of consistency, stating that unless there is a significant change in facts or law, the treatment should remain consistent. However, due to the unique facts of the current year, including repetitive transactions in certain shares, the Tribunal upheld the mixed treatment.

4. Impact of Frequency and Volume of Transactions:
The AO and CIT(A) both noted the high frequency and volume of transactions. The Tribunal agreed that these factors are significant but not solely decisive. They emphasized the need to consider the overall context, including the assessee's intent and the treatment in the books. The Tribunal found that while some transactions were frequent and voluminous, indicating trading, others were consistent with investment activity.

5. Effect of Borrowed Funds on Nature of Income:
The AO noted that the assessee used borrowed funds for share transactions. The CIT(A) and Tribunal considered this but found it less significant since no interest was paid on these funds. They concluded that the use of borrowed funds does not necessarily indicate business activity, especially when the transactions are treated as investments in the books.

6. Separate Portfolios for Investment and Trading Activities:
The assessee maintained separate portfolios for investment and trading activities, treating delivery-based transactions as investments and non-delivery-based transactions as trading. The Tribunal upheld this approach, noting that maintaining separate portfolios is consistent with the CBDT Circular No. 4 of 2007, which allows for distinct treatment of investment and trading activities.

7. CBDT Circular No. 4 of 2007:
The AO applied the parameters of the CBDT Circular No. 4 of 2007 to classify the gains as business income. The Tribunal acknowledged the circular but emphasized that no single factor is decisive. They considered the overall facts and circumstances, including the intention behind transactions and the treatment in the books, to determine the appropriate classification.

8. Past Assessments and Principle of Res Judicata:
The assessee argued that past assessments treated similar transactions as capital gains, invoking the principle of res judicata. The Tribunal noted that while res judicata does not strictly apply to tax proceedings, the principle of consistency is important. However, they found that the unique facts of the current year justified a different treatment for some transactions.

Conclusion:
The Tribunal upheld the mixed treatment of the gains, classifying some as STCG and others as business income based on the overall facts and circumstances. They emphasized the importance of intention, treatment in the books, and consistency with past assessments while also considering the unique facts of the current year. The decision balanced the principles of consistency and the need to consider the specific facts of each case.

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